UOL Group - CIMB Research 2017-11-09: Robust Underlying Operations

UOL GROUP LIMITED U14.SI

Robust Underlying Operations - UOL Group

UOL Group's 3Q/9M17 operating earnings made up 26%/77% of our FY17 forecast, in line with our expectations.
Visible new residential launch pipeline for FY18F.
Large recurring income base from expanded rental and hotel base.
Maintain Add with a higher TP of S$9.62.

UOL reported 3Q17 revenue of S$538m (+37% yoy) while net profit jumped six-fold to S$618m.
3Q17 results reflected the impact of adopting FRS110 that consolidated UIC’s earnings as UOL has raised its stake in UIC to 48.96%.
In addition, applying FRS103 i.e. imputing a fair valuation for all identifiable assets and liabilities of the acquired entities resulted in a negative goodwill of S$542.1m. Excluding the non-cash item, operating earnings would have grown 8% to S$90.9m. 3Q17 book NAV rose to S$10.95.

Property development revenue rose 41% yoy to S$291.5m with billings from ongoing projects such as Principal Garden (83% sold) and The Clement Canopy (70% sold) as well as from consolidating UIC’s Alex Residences (88% sold), and Pollen & Bleu and V on Shenton (73% sold).
Excluding the consolidation effect, revenue would have dipped 3% yoy due to completion of Riverbank @ Fernvale.

The group has an attributable pipeline of 729 units that could be launched from 2018. These include the Raintree Garden enbloc site as well as the two land parcels in the East Coast area.
We reckon UOL could generate decent margins from these sites as part of them were acquired in 2016, before the recent sharp run-up in land prices.

3Q17 rental revenue surged 44% yoy to S$82.7m with the consolidation of UIC’s leasing income.
Together, UOL/UIC has a total of 5.69m sq ft of office and retail space in Singapore, located within the CBD as well as in the city fringe and suburban areas. This puts the group in a good position to benefit from the recovery in the office leasing market.

UOL's hotel operations saw a 24% rise in revenue in 3Q17, thanks to a 1% rise in Singapore RevPar and a 2% improvement in Australia hotel RevPar. There was also additional revenue from the Pan Pacific Melbourne which was acquired in Jul 2017.
To optimise asset returns, UOL plans to redevelop the Pan Pacific Orchard into a new 340- room hotel from 2Q18. Looking ahead, UOL expects the operating environment in China and Myanmar to remain challenging due to incoming supply.

Balance sheet remains strong with post consolidation net debt to equity ratio of 0.37x at end-Sep 2017 and net debt of S$3.39bn. This puts the group on good footing to reinvest its capital, in our view.

We tweak our FY17-19 EPS estimates to reflect the consolidation exercise. We lift our RNAV to S$12.02 to include the increase in our target price for UOB and higher UIC RNAV on the back of minor cap rate compression for its retail assets. Hence, our TP is lifted to S$9.62, still based on a 20% discount to RNAV.
We maintain our Add rating.
Downside risks include slower office rental recovery.

LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-11-09

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 9.62 Up 9.030